What Counts As A Freebie? Economists Weigh In

As a debate over ‘freebies’ has raised questions if such spending is justified, economists weigh in on what can be and what should not be promised.

But is the differentiation that simple?

When the government’s recovery is lower than the cost of provision, such services are freebies, said NR Bhanumurthy, vice-chancellor at BASE University. It extends to any public policy that does not improve production and productivity in the mid and long term, he said.

“While the quantification is difficult, we do understand the concept of a freebie,” he said. From free electricity and loan waivers to implicit subsidies such as LPG, diesel or petrol are freebies, he said. They encourage perverse consumption of scarce natural resources.

Citing an instance, Bhanumurthy said in case of power, if all states start to provide such freebies, the quantity and quality of power distribution will suffer. Some states that do spend on freebies have been found to show declining social spending such as on education and health.

Also, a clear indicator of deteriorating government finances is the government debt-to-GDP ratio. An increasingly adverse government debt-to-GDP ratio shows why the debate around the freebie culture this time is more serious, Bhanumurthy said. “Especially for states that already have an adverse debt-to-GSDP, it could take just a few years for the fiscal situation to collapse drastically.”

Freebie is a generic term. Governments need to provide public goods that are non-excludable and non-rivalrous by definition, Radhika Pandey, senior fellow at the National Institute of Public Finance and Policy, said.

“There is a need for a framework and a thought-out strategy towards provision of merit goods, with the current scenario increasingly becoming unsustainable on a fiscal basis.”

The centre’s finances and its debt have always been discussed, and now, with a resurgence of interest in state finances there is a renewed debate around freebies as they are responsible for poor performance by some states, Pandey said.

The economy needs to be put on a sustained growth path and if capex is the way out, there needs to be re-prioritisation of expenditure trends. The centre has increased its emphasis on capex and is providing states with incentives for them to raise their capex.

That said, both the centre and states have a history of freebies. There is a need for one step further deliberation and a transparent framework which needs to be applicable to both, she said.

What constitutes a freebie and what is welfare is not something that can be determined by a court or by some experts, according to Reetika Khera, professor at IIT-Delhi. These are questions of democratic debate, and they are rightly debated in the context of electoral promises in India. Of course, it is another question altogether whether they influence voters in any manner at the time of casting their vote, she said.

“But what is more worrisome is that the court has (reportedly) said we need to strike a balance between welfare and fiscal concerns,” Khera said. “The precarious condition of state finances is a serious concern.”

There are, however, two framing problems in this debate, she said. One, the debate only focuses on expenditures that flow towards the poor, such as NREGA, pensions, etc. but never on the drain on the exchequer that comes from bad loan write-offs, vanity projects or industry sops. Two, the debate never focuses on avenues for raising tax revenues, for which there are many under-utilised tax instruments in India.